Selecting outputs at Best Buy

The Media Wonk got a fair amount of feedback on a post from last week on the controversy over the MPAA’s petition to the FCC for a waiver on the rules on selectable output controls. Some readers liked my analysis; others were something less-than convinced. I commend both to this feature article on Best Buy in the current issue of Bloomberg BusinessWeek (nee BusinessWeek), which provides a very useful perspective on the same phenomenon I was trying to get at in my SOC post, namely, the complex and conflicbest-buy-storeting business relationships that retailers, content owners and device makers increasingly must navigate in the digital age, and how that might manifest itself in their strategic moves.

The thrust of the piece is that Best Buy, as the last CE retail giant standing since the liquidation of Circuit City earlier this year, is starting to flex its muscles with vendors to influence product design, merchandising strategies, customer service and other aspects of their business as it looks for ways to fend off new competition from the likes of Wal-Mart and Amazon.

Here are a few of the key paragraphs:

Executives at several major consumer electronics companies worry privately about Best Buy’s growing influence. They’re concerned that [CEO Brian J.] Dunn and his team could block them from getting innovative products in front of customers or favor Best Buy-backed goods over their own. “We used to call them the 800-pound gorilla,” says the executive of one company that sells televisions and other products to Best Buy. “Now with a lot of competition gone, they’re the 1,000-pound gorilla.”

One example of the rising sensitivity is Best Buy’s recent move into digital services, including music and movies. The company acquired the online music service Napster a year ago and then took a stake in CinemaNow, Sonic Solution’s movie-streaming service, in November. Now the retailer is giving prominent play to Dell computers loaded with Napster, beginning with a free year of the music service, and plans similar promotions with CinemaNow through participating partners. Hardware makers, which usually get paid bounties to load such software on their PCs, may find it tougher to get payments from rival services such as Netflix or Rhapsody if they want a piece of the $300 billion digital services market.


The job of knowing just how far Best Buy can push before manufacturing partners push back falls in large part to Kal Patel, executive vice-president for emerging business. Former CEO Anderson hired Patel away from the consulting firm Strategos in 2003 to direct the retailer’s strategy, and Dunn has given him broad leeway to transform Best Buy into a technology company. Patel suggests, unapologetically, that Best Buy and its partners will have to get used to a new relationship. “If you’re in the technology business, we’re going to have to learn to deal with constant conflict,” he says.

Over the past two years, Patel has virtually lived on planes and in hotel rooms in an attempt to guide the company’s technology push by learning from established giants and startups. On a recent trip to California, he huddled with executives at Cisco Systems to discuss partnerships aimed at connecting more consumers to more devices. While prepared for conflict, Patel also found plenty of collaboration.


In another move, Bloomberg BusinessWeekhas learned, Best Buy plans to launch its own advertising business early next year. The company will let movie studios, PC makers, and other companies run trailers, songs, or commercials on the thousands of televisions, PCs, and cell phones within its stores. Sony, Toshiba, and Samsung have already signed on to advertise. Still, the effort could prove controversial since rivals may end up advertising on each other’s devices. Dunn won’t reveal revenue projections but says the business will “grow into a big piece of what we do.”

For many years, when cable operators or other types of service providers would approach a studio executive with a plea for a better VOD or pay-per-view window, the executive could easily deflect the plea by saying, “when you start writing me checks as big as the ones Wal-Mart and Best Buy write for my DVDs, then we’ll talk,” or words to that effect.

These days, however, those DVD checks aren’t what they used to be and probably never will be again. As a result, the studios are in need of new distribution channels and new distribution partners. Figuring out which channels and which partners they like best is going to be the primary strategic preoccupation for the ancillary market divisions of the studios over the next few years.

movie-download-80The tricky part, of course, is keeping everyone happy and on-board, even as the studios have to make choices. As the BusinessWeek piece noted, channel conflict is a way of life in the technology business, and the more the studios become enmeshed in that ecosystem, the more it will be for them, also.

What could that mean? Let’s suppose, hypothetically, that Best Buy’s venture capital arm, described in the BusinessWeek piece, invested in a clever new DRM scheme for distributing movies digitally on a transactional (i.e. non-subscription, non-bundled) basis. And let’s suppose that several studios were also investors, making them de facto partners with Best Buy in the venture.

Now let’s suppose you’re a studio exec sitting in a meeting with Best Buy about such a venture, and the Best Buy guy says, “so, what’s this I hear about you giving the cable guys a new window, ahead of ours, where people can copy?”

I can’t tell you why, but I can tell you that such a scenario is not at all far-fetched. So where does that leave the studios? The studios, understandably, would like to create a new, high-margin VOD window for movies immediately following their theatrical release. But they’re also keen to create a new, digital distribution business in a later window to replace the disappearing DVD business. What’s more, their prospective partners in the latter window are, quite literally, partners, whose interests the studios must respect.

The point is, while release windows are designed to be exclusive, they don’t exist in isolation from each other. Changing one inevitably affects the others. So you have to be very careful about how you make changes, let alone introduce new windows.

Even if plugging the analog hole did nothing to affect the overall level of movie piracy, in other words, that’s not the only reason for plugging the analog hole, or at least wanting to look like you’re trying to close it.

Those other reasons, of course, are fundamentally business concerns. And the regulatory relief the studios are seeking is as matter of public policy, where business concerns should not be the only–or eventhe  primary–issues considered. There may be perfectly sound public policy reasons for rejecting the MPAA’s petition. But there are also perfectly sound reasons–short of a quest for world domination–for the studios to pursue it.